On the foundation of performance measures under asymmetric returns

Authors: C.S. Pedersen¹; S.E. Satchell²

Source: Quantitative Finance, Volume 2, Number 3, June 2002 , pp. 217-223(7)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

We examine two performance measures advocated for asymmetric return distributions: the Sortino ratio - originally introduced by Sortino and Price (Sortino F and Price L 1994 J. Investing 59-65) - and a measure based on power utility introduced in Leland (Leland H 1999 Financial Analysts J.27-36). In particular, we investigate the role of the maximum principle in this context, and assess the conditions under which the measures satisfy it. Our results add further motivation for the use of a modified Sortino ratio, by placing it on a sound theoretical foundation. In this light, we discuss its relative merits compared with alternative approaches.

Document Type: Miscellaneous

Affiliations: 1: Oliver, Wyman and Company, 1 Neal Street, Covent Garden, London WC2H 9PU, UK 2: Faculty of Economics and Politics, Cambridge University, UK

Publication date: 2002-06-01